Creating Brands: Tesco’s New Approach to Private Label

In a bid to compete directly against premium brands and increase its margins, Tesco is launching several venture brands which bear no reference to its name.

Following the introduction of the Yoo yoghurt brand in March 2011, Tesco launched in the UK in June other ranges which it calls “venture brands”, including ChokaBlok ice cream, Lathams dog food and NutriCat cat food. They were joined in early July by the Italian food line Parioli, which confirms the highly diverse nature of these brands and how Tesco seeks to achieve a more precise targeting of various customer groups.

Like branded goods, these products are promoted through dedicated advertising campaigns and websites, but unlike traditional private label eschew the Tesco name on their packaging beyond the small print.

The creation of these new ranges was one of the seven pillars of Tesco’s strategy according to its new CEO Philip Clarke, appearing at number six under the tag: “To be a creator of highly valued brands”. This move represents a bold new strategic direction for the retailer, which hopes that the new brands can go head-to-head against premium branded items and ultimately help increase its margins and customer loyalty. Do these new names have a fighting chance of upsetting established brands in highly competitive categories?

Finding shelf space for the new ranges

Tesco’s private label assortment is one of the broadest and most competitive among European grocery retailers, based on sophisticated segmentation between budget (Tesco Value), medium-priced and premium (Tesco Finest), in addition to various sub-ranges. While the new brands will add to this level of complexity and could help increase customer loyalty, the additional costs of launching several category-specific brands could also undermine the support and shelf visibility for Tesco’s other private label lines.

As these new products will need to be given prominent shelf space, this will come mostly at the expense of major branded products, some of which may face delisting. By further squeezing out these brands, Tesco will fuel the lingering mistrust between large retailers and FMCG manufacturers.

Price positioning: More premium than other private label?

At £3.99 for 500ml, the price positioning of ChokaBlok is close to that of premium brands, with a difference of less than 5% with a similar Häagen-Dazs variant, and more than double the price of a comparable Tesco Finest product. With this price strategy, Tesco intends to generate much higher margins than with traditional private label as production costs are likely to be almost identical. However, the brand’s high price risks damaging volume sales, which are critical if Tesco is to achieve this goal. As a result, Tesco will need to rely heavily on advertising and promotional offers to lure customers away from premium labels and kick-start the brand.

This premium price strategy sets Tesco’s new brands well apart from Aldi and Lidl, which have a long experience of selling fantasy brands with no reference to their banners. However, the German discounters may have partly inspired Tesco, as the earlier launch of the Discount Brand in 2008 highlighted.

However, as they are expanded into numerous categories, Tesco’s venture brands will not adopt a uniform pricing strategy, and may in some cases offer products with a lower price positioning, fitting in between its value range and Tesco Finest. For example, the Yoo yoghurt range undercuts popular yoghurt brands in the UK by around 20%.

A few brands set to make an impact in their categories

Highlighting that the venture brands will be extended to a broad range of categories, including non-food if successful, Tesco has trademarked the names Carousel in the toy category and Streetwise in consumer electronics. By launching a “brand laboratory” across several product categories almost simultaneously, Tesco’s major challenges in establishing a strong image and premium credentials for its new brands will be replicated across each category.

A heavy advertising and promotional budget may not be enough to guarantee success throughout; product quality will also need to match or exceed that of premium brands in order to create awareness and customer loyalty.

Ultimately, shelf space availability and consumer response should dictate which of these venture brands will be here to stay. As Tesco is spreading the risk across diverse product categories, it is likely that some brands will find a wide audience, while many others will have a short life.

But with Tesco’s scale of operations and bargaining power among Europe’s grocery retailers set to make these new brands highly competitive, even if only a handful of them make a strong impact, this will significantly change the competitive landscape in these product categories and possibly encourage other retailers to imitate Tesco’s move.